Q&A: What the debt ceiling deal means for your student loans

posted by Idealist on August 8, 2011

Guest blogger Heather Jarvis provides education and training for student loan borrowers and the people who love them. Here she sums up what college students, recent graduates, and folks considering grad school need to know about the debt ceiling deal.

Do those peaceful hours studying feel like a long time ago? Its never too late (or too early!) to understand your student loans. Photo via Tulane Public Relations (Flickr/Creative Commons)

Last week the House and Senate passed the Budget Control Act of 2011 [PDF] just ahead of the deadline, and President Obama has signed the act into law. Key student aid programs are largely intact, and I am relieved to report that the new law avoids some of the proposed cuts that would have hurt students the most.

There are three main provisions in the debt ceiling deal related to higher education:

Funding is provided for the Pell Grant program.

The in-school loan interest subsidy for graduate and professional students is eliminated beginning July 1, 2012.

“Repayment incentives,” or cost reductions earned by certain borrowers, are eliminated for loans disbursed on or after July 1, 2012.

Now for some Q&A

Q. Students shoulder $4.6 billion of the deficit reduction (so far). How is that possible?

The elimination of the graduate and professional interest subsidy and the loan repayment incentives are estimated by the Congressional Budget Office to produce a savings of $21.6 billion. $17 billion of that savings will go to shore up the Pell Grant program, and $4.6 billion will be used to reduce the deficit. Read on for more details about all of these changes.

Q. I have student loans. What steps should I take?

Always borrow federal student loans first and only consider more expensive private student loans if you must.

If you are still in school and you can afford it, consider paying student loan interest as it accrues. You’ll lower your costs over time.

Choose the repayment plan that makes the most sense for you. Income-Based Repayment (IBR) is a good option for people with low income compared to their student loan debt.

Pay off your most expensive loans first.

Find out if Public Service Loan Forgiveness can help.

Q. Is my Pell Grant safe?

Pell Grants are safe for now; the White House indicates that the funding will be sufficient to keep them at their current level of $5,500. If they had been cut, students may well have had to increase their reliance on student loans. Thankfully, the Budget Control Act shores up the Pell Grant program by providing $17 billion in funding over the next two fiscal years. However, with spending cuts anticipated in the future, Pell Grants remain at risk.

Q. What should graduate and professional students expect?

Graduate and professional students will pay more for student loans. The Budget Control Act eliminates the in-school interest subsidy for graduate and professional students, so these folks will pay more interest over time. However, it does not eliminate the interest subsidy for undergraduate borrowers.

Subsidized Stafford Loans have historically been available to both undergraduate and graduate borrowers with demonstrated financial need. In the case of Subsidized Loans, the government pays the interest that accrues on the loan while the student is in college. Without the subsidy, students must themselves pay the accruing interest as they go, or have the unpaid interest added to the principle amount of their loan and pay it later.

To encourage borrowers to repay on time, the Department of Education was previously authorized to provide certain incentives, including an origination fee rebate and interest rate reduction. Borrowers would earn these benefits by making on-time payments over 12 months. Beginning on July 1, 2012, the Department of Education is no longer authorized to provide these repayment incentives, but may continue to allow an interest rate reduction for borrowers who enroll in payment by automatic electronic debit.

Q. Is it possible that there will be even more cuts to student aid?

Yes. The Budget Control Act requires Congress to come up with a lot more deficit reduction by Thanksgiving. Additional spending cuts may come in part from higher education. Stay tuned

Do you have additional questions we can try to answer? Leave a comment below and well do our best!

Former capital defense attorney and long-time public service advocate Heather Jarvis dedicates herself to helping students make informed decisions about their student loans. Since 2005, Heather has helped more than an estimated 25,000 students understand and overcome college debt through in-person and online trainings and resources. As Senior Program Manager for Advocacy and Outreach at Equal Justice Works, Heather played a role in the passage of the College Cost Reduction and Access Act, which made IBR and Public Service Loan Forgiveness a reality.

Want to learn more about Public Service Loan Forgiveness? Register for one Heather’s popular free webinars and get the scoop. Heather provides free tools and information for student loan borrowers and the people who love them at www.askheatherjarvis.com .